Tangled Webs

Somehow I found some free time today so I chased one of my pet projects. I have been trying to suggest that if we gave our customers an incentive to schedule their orders (ask for them to ship at some point later than the time of order entry), it would relieve a lot of the problems in supply chain and production process.

Currently we experience experience spikes in demand, a “hockey-stick” effect where orders go zooming up a the end of the month and at the end of the quarter. So it would appear that the sales force is out there making bargains and cutting deals so that they can pump the numbers up before the end of the quarter.

I wanted to show how the company was losing money through this fireselling practice. But an initial check showed that our margins actually increased later in the month. This was so contrary to known reality that I knew something was wrong. I scrubbed out of the data orders that showed extreme markups (mainly due to bad cost data allowing the price to appear inflated). Then I broke the data down by type of product, looking for product with a premium margin that did not sell until the end of the month–at a higher margin than mainline product, but reduced from its nominal selling price.

Put simply, I spent hours trying to get the numbers to show the right answer, and I could not do it. For some product lines there is a slight dip in margin later in the month, but basically the variation is in line with what happens throughout the entire month.

I asked the planning manager why the numbers wouldn’t show what we both knew was true, and he said most of the bargaining at the end of the month is done on terms–how long after the order, shipment, or delivery of the product the customer has until they have to make payment.

Which is exactly the way we are trying to squeeze our suppliers so that we can pay for stuff only after we have already sold it on again, thus improving our cash flow.

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